The trend of CPG companies going direct-to-consumer (D2C) is on the rise. Compared to the traditional CPG model, CPG+D2C may provide several benefits:
- Brand recognition and loyalty: At this age of ratings, “stars,” and comments, the perception of a CPG brand impacts company value directly. D2C, supported by targeted promotions, enables stronger brand loyalty. Of course, the CPG company should also support its D2C initiative with better customer experience, omnichannel shopping alternatives, ease of use for commercial websites, frictionless returns, etc.
- Better and faster feedback on your short life-cycle products: In this “build anywhere, sell everywhere” world, CPG product life cycles continue to get shorter. Direct access to customer data through D2C enables product improvement, innovation, and transition opportunities.
- New revenue stream: D2C for a CPG company has the potential to improve revenue and margins by cutting out the middlemen. However, CPG companies need to be careful about competing with their existing retail/wholesale/distributor customers/channels. This is where optimal product and channel segmentation becomes critically important, as the wrong portfolio in your D2C efforts may result in soured relationships with your existing channels and a net loss of profits.
- A responsive supply chain: D2C requires a specialized supply chain due to low volume/high-frequency shipments using primarily parcel or LTL shipment modes. Quicker response times, pick efficiency as well as packaging requirements are very different from what CPG operations are accustomed to. Neglecting the necessary considerations of the supply chain can lead to problems for D2C, including complaints from unsatisfied consumers, the C in D2C.
Consumer-Oriented Demand Planning
The D2C approach begins with understanding consumer habits and prioritizing opportunities accordingly. Most CPG companies sell through multiple channels with differing practices across countries and geographical regions. Most commonly, the primary channels for CPG companies comprise retail, wholesale, distributors, government contracts, and e-commerce.
The opportunity for better demand planning at retail, wholesale, and distributor/franchise channels comes from the availability of data representing consumer sales as well as external data such as weather, sector benchmarks, and price monitoring applications. Innovative CPG companies use this data (commonly called point-of-sale or POS data) to plan their demand with a better view of the consumer preferences for their products, in addition to the historical data representing channel sales.
Segmenting Stores and Products
Another way of selling direct to consumers is maintaining points of sale, such as brick-and-mortar stores, pop-up stores, and seasonal stores. Not all points of sales are created equal, nor do all consumers have the same propensity to buy a product. Therefore, store-based product assortments contribute to higher profitability by optimizing the margin contribution of your inventory investment.
For instance, high-income demographics require more frequent replenishment of high-margin products. Similarly, a store in a relatively cold region may require a promotion strategy to deplete its ice cream stock due to wrong stocking policies.
Strategic Network Design for D2C
Network design tools are the key for CPG companies going to D2C as they enable CPG companies to evaluate the strategic and tactical scenarios that will make a D2C initiative successful – whether that means opening dedicated facilities, or adjusting their existing distribution infrastructure for efficient D2C practices:
- What are the cost/service consequences of different options in new network practices (e.g., new DCs, additional roles for existing DCs, capacity expansion, skill addition, system upgrades, etc.) for a sustainable and profitable D2C operation?
- How can CPG companies increase inventory turnover and profit with optimal inventory investment and inventory replenishment practices for D2C products?
- How can they minimize their carbon footprint when they adopt different transportation, handling, and storage practices for D2C?
In closing, Consumer-oriented planning and execution support for CPG companies come with both opportunities and challenges. It can be observed that demand planning, product and store segmentation, and strategic network design are all critical considerations for implementing an effective and profitable DC2 practice.